2011-03-28

What is theory, or what is the role of theory especially in social sciences? In his book, "Theory of Decision under Uncertainty," Professor Gilboa shows thought-provoking argument.

The following quotes are all from Chapter 7: "The Role of Theories."

Theories are never correct, and in the case of the social sciences they tend to be almost always wrong. The question is, therefore, not whether they are right or wrong, but whether they are wrong in a way that invalidates the conclusions drawn from them. In other ways, theories are tools for reasoning and rhetorical devices.

The last standpoint I think is more or less common among great Israeli theorists such as Bob Aumann and Ariel Rubinstein. In a later part, Gilboa also says as follows:

Recall that we are not hoping to obtain theories that are very accurate. We use the theories more often as reasoning aids.

Then, the author further offers philosophical argument on science, referring the key thinkers such as Friedman, Popper, and Kuhn.

It follows that the degree to which we are willing to accept an assumption does not need to be a monotone function of its degree of accuracy. The assumption is tested based not only on its direct implications, but also on its indirect implications, which may involve nontrivial theorems.

The preceding discussion brings to mind Friedman's celebrated argument that theories should not be judged based on the validity of their assumptions, but on that of their conclusions. This argument is a bit extreme, and I would be careful to accept it (because of the following two reasons).
1) It is generally hard to draw a sharp distinction between assumptions and conclusions, completely ignoring the veracity of the former and testing only the latter.
2) Justifiably or not, it (= Friedman's argument) has become a bit of an excuse not to question the theory.

The logical positivist heritage (coupled with Popper's contribution) suggests that our theories should be falsifiable. The axiomatization we saw earlier is formulated in terms of conditions that can be violated. However, a theory such as utility maximization is not always easy to falsify. [...] Only in carefully designed controlled experiments can one hope to unambiguously refute a theory, but then one faces questions of external validity: the fact that a theory fails in artificial experimental environment may not be an indication that it will also fail in natural environment, to which it was presumably intended in the first place.

It started with Kuhn (1962), who asked questions about scientific paradigms and the way they changed. Kuhn described scientific evolution as a social phenomenon that need not converge to any objective truth. Rather, it was a process involving many factors, including accumulating evidence on the one hand, but also personal interests and tastes on the other.

The postmodern critique sometimes appears to confound descriptive and normative claims. It may well be true that science will never be able to be completely objective. But this does not mean that is shouldn't try. [...] There are instances of postmodern critique that sound to me similar to the argument, "We know that wars are inevitable. Hence, let's start shooting people."

2011-03-09

R&D-intensive industries are natural context in which to address the following questions; “Do dominant firms tend to maintain, or even increase, their market dominance?” and “Is market power temporary or is it permanent?” Gilbert and Newbery (1982) develop a strong argument in the view of persistence of incumbency. They claim that a monopolist has more to lose from letting competition in than a potential entrant has from challenging the monopolist. As a result, the tendency should be towards persistence, not alternation, of market dominance. Interestingly enough, they relate their model to a model of an auction market and state that preemption is a Nash equilibrium of the corresponding auction game. (A monopolist has higher willingness to pay than that of an entrant and hence bids higher amount. I think this result can be quoted in my license auctions paper.)Reinganum (1982) makes the point that Gilbert and Newbery’s result depends on their assumptions on the deterministic process of R&D. She shows that with uncertainty, there are cases when the probability the monopolist is replaced by an entrant is greater than the probability of persistence, hence R&D would decrease the market dominance. Her logic is as follows. Under uncertainty, with positive probability, the potential entrant does not succeed in inventing a new product, even though it invests a positive amount. When this happens, a successful incumbent would only be replacing its monopoly product with another monopoly product. Because of this “replacement” effect, a monopolist has less incentive to engage in R&D that a competitive firm has.

ReferencesGilbert and Newbery (1982) “Preemptive Patenting and the Persistence of Monopoly” AER, 72Reinganum (1982) “Uncertain Innovation and the Persistence of Monopoly” AER, 73

My research focuses on Business Economics and Game Theory with a primary interest in Market Design. My research papers are published in leading economics journals, including the American Economic Review and the American Economic Journal, as well as leading journals in other related fields such as AAMAS and Artificial Intelligence.